What is purchasing power parity (PPP)?

Each country describes their economic data, such as Gross Domestic Product (GDP), GDP per Capita, income or poverty, in their own currency. In order to make comparisons among countries, all of the currencies have to be made equivalent, This is most commonly done by making the national currencies comparable to the US dollar, by figuring out how many local currency units (e.g., pounds, francs, yen) it would take to buy what could be bought with one US dollar. Then comparisons could be made between countries.

For example, suppose we look at annual GDP in the US, Russia and Japan.

The basic idea is for each country to find prices for a 'basket' of goods and services that represents their economy, measured in their own currency. Then the price of the 'basket', in local currency, is compared to the price of the same 'basket' of goods and services in a base country, say the USA.

The ratio of the price of the 'basket' in local currency to the price of the same 'basket' in US dollars, is the PPP.

For example, in 2008, representative 'baskets' of goods in Russia and Japan show PPPs for Russia and Japan.

So a 'basket' of goods that cost 100 rubles in Russia would cost, in the US, about 7$. Similarly, a basket that costs 100 yen in Japan, would cost, in the US, 85 cents.

The PPP is similarly used to calculate many economic indicators in common dollars, such as the size of the economy, average income per capita, the percent of people in poverty (for example, percent of people with incomes under $1 a day), and income inequality.

Table 4, below, shows how the PPP is used to calculate national GDP in US dollars.

See also

External links

International Comparison Program (ICP) 2011 Round The IPC is a worldwide statistical partnership to collect comparative price data and compile detailed expenditure values of countries’ gross domestic products (GDP), and to estimate purchasing power parities (PPPs) of the world’s economies.